As I write this, Lloyds (LSE: LLOY) shares are falling again. It’s not alone — Barclays and NatWest are crashing too.
The FTSE 100 banks are down around 3% so far today. Swiss bank Credit Suisse is at the heart of the storm, down more than 10% and still heading south as banking crisis anxieties return. This makes now either a brilliant time to buy Lloyds or a terrible one, depending on two factors.
The first is your attitude to risk. Only you know that. The second is how far the banking crisis will go. Nobody knows that.
Buying opportunity for the brave
In the aftermath of the financial crisis of 2007/08, regulators worked flat out to make sure it didn’t happen again. Banks have been forced to improve their capital strength, avoid risky shadow banking operations, diversify funding sources, and report over-the-counter derivate trades. Senior management is more accountable, while remuneration rules now discourage excessive risk-taking and misconduct. Or so we’re told.
Now we are going to discover if all that hard work will pay off. Lloyds looks safer than most, as it is now mainly UK focused, protecting it from international contagion.
Barclays has been hit harder by the collapse of Silicon Valley Bank, thanks to its US arm and Barclays Capital division. Lloyds shares have fallen ‘just’ 7.76% over the last week, while Barclays is down 12.87%. Measured over one year, Lloyds is down just 2.5%, while Barclays has fallen 18.71%.
As the financial crisis showed us, banking contagion doesn’t happen overnight. It takes time for risks to emerge. On Wednesday, frenzied investors were dumping banking stocks as Credit Suisse’s biggest backer refused to help. Next day, after the Swiss National Bank stepped in with a $54bn loan, they couldn’t get enough of the sector.
Lloyds has capital strength
Investors are running scared today but Lloyds seems well capitalised, with a strong CET1 solvency ratio, which compares a bank’s capital against its assets. Its latest results put it at 14.1% after capital distributions and pension contributions. That’s ahead of its 12.5% target.
Lloyds board considered its capital position strong enough to announce £2bn of share buybacks. It also generates enough cash to maintain what management calls “its progressive and sustainable ordinary dividend policy”.
Last year, Credit Suisse made a record £7.9bn loss. By contrast, Lloyds made a pre-tax profit of £6.9bn. Last year, Credit Suisse customers withdrew staggering $123bn, mostly in Q4. There is no run on Lloyds.
It is still risky buying Lloyds shares today. I have no idea how far the banking contagion will stretch, and nor does anybody else. They may be hidden nasties buried on its balance sheet.
I bought Lloyds in October, and have enough exposure to its fortunes. If I didn’t, I’d dive in at today’s valuation of just 6.5 times earnings. This is a great income stock with a forecast yield of 5.7%, covered 2.7 times by earnings. As ever, dividends are not guaranteed. If public sentiment turns against the banks, it could come under pressure not to pay it.
Today’s 46p share price looks like a buying opportunity for long-term investors like me. I’d drip-feed money in, though, because the Lloyds share price could fall further if the crisis spreads, even if the bank itself is not at fault.
